The most pleasant surprise in my first year teaching economics and government full-time was being asked to take on a financial literacy course, too. My friends and family have always teased me about keeping the thermostat at 78° during Texas summers, but it looks like such prudence paid off.
Current events have helped illustrate this class, just as they have for economics and government.
The Wall Street Journal recently detailed how consumers are making “every penny count” on groceries. Some are diluting household cleaners, while others are merely dabbing their toothbrush with toothpaste.
This is largely due to the inflationary wreckage from the Covid shutdowns a few years ago. The ascendant protectionism of the last decade has added even more upward pressure to prices.
There is a cruel irony here.
Policymakers, economic experts in the media, and academia have made no secret this century of their desire for higher inflation. It stems from both a fear of Great Depression-era deflation, and a belief that a rising price level spurs production.
This is merely another example of how far this cohort has migrated from basic economics toward a central planning frame of mind, and lost touch with the average citizen along the way.
A basic supply and demand graph does indeed show that high or rising prices attract more production. Under normal circumstances, however, this is often the result of someone striking gold with a new product, not some bureaucrat in Washington, DC, flipping a switch.
For a while, such an innovator has a corner on the market, as he’s the only producer of this new product. Operations likely being relatively small at the outset, he raises prices to keep from being overwhelmed by demand, with the higher price also indicating who values the product most.
This high demand should also lead him to start thinking long-term about expanding, and achieving economies of scale. That would eventually push down the consumer price. Inevitably, other enterprising entrepreneurs will see an opportunity to grab a piece of the pie.
The example I always use with students is the now-ubiquitous flat-screen TV.
When I bought my first one more than twenty years ago, it was a 42″ plasma that went for around $2,500. In Elf (2003), the character Miles Finch bragged about them. They weren’t cheap.
Eventually, more competitors jumped in offering the same for less. Or, they offered more features for the same price, like high-definition or app capability (smart TVs), etc. Or both.
Voila! Now, customers can get the same thing I once paid $2,500 for, at a tenth of that price. I watched Wal-Mart employees yesterday wheeling around a 98″ that goes for $1,500—more than double the TV for 60% of the price! This virtuous cycle is the organic way in which prices drop.
Most consumers would likely welcome such deflation. Not the elite establishment though, and for a couple of reasons.
By comparison, in the inverse case, when people expect a rising price level, they tend to buy stuff as soon as they get the money, before their purchasing power drops. See Venezuela or Zimbabwe for extreme examples.
It’s not illogical to assume the opposite in a state of deflation. If consumers know prices are going to go down, we’ll hold off on purchases. Why buy today if it’s pretty certain to cost less tomorrow?
But we’re Americans: we like to buy stuff, and the sooner the better. It’s practically scientifically-proven. We like to buy so many gadgets, toys, and trinkets that we have to rent storage space for our stuff.
How many cars have lost their space in the garage for exactly this reason?
And even if we do hold out, and some semblance of deflation creeps in, it would necessarily bring with it a rising value in the dollar, which would literally allow for more bang for the buck. A stout correction in that direction is long overdue.
To make that stick, however, we need leadership that stops toying with Americans and affixes a value to our currency. The last time the dollar had at least firm backing in DC, in the 1980s and 1990s, we experienced solid, steady growth with minimal interruption. The results when that’s been the case (pre-1971, the 1980s and 1990s) speak for themselves.
But here we are, so hindered by higher prices that even “cheaper generics haven’t seen a corresponding increase” in demand. We’re where experts feared we’d be, but poorer for it.
Though consumer surplus is unlikely to be included in the relatively abbreviated econ lesson in financial literacy, I might mention it nevertheless. It would be relevant to discuss what they might do with the savings such as we’ve seen with flat-screens.
If they arrive at a point in life, however, where they’re squeezing out savings by “using half the recommended amount” of “laundry powder,” they’ll already know more flat-screens aren’t in the calculus.
The post A Dream of Deflation was first published by the Foundation for Economic Education, and is republished here with permission. Please support their efforts.
